Inpex Corporation advises of cost overrun, delay at Ichthys LNG

By Angela Macdonald-Smith

Cost overruns across Australia's liquefied natural gas construction sector have topped $US30 billion after Inpex Corporation advised of a major cost increase and delay at its Ichthys venture in northern Australia.

The Japanese company advised late Friday that the Ichthys venture would start production as much as nine months late and cost about 10 per cent more than its original $US34 billion budget.

UGL's history with Ichthys is appalling.

The problems at the venture, Japan's largest investment project in Australia, come as little surprise to close watchers of the industry given well-flagged bottlenecks at the two South Korean shipyards where two enormous offshore pieces of equipment for the project are being built.

Whether slower than expected construction work at the onshore site at Bladin Point near Darwin is also to blame remains unclear.

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However, several other Australian LNG construction projects have been hit by lower than expected productivity at onshore sites, and delays for bad weather and revisions to work contracts.

The recent softening of the oil services market and weakening of the Australian dollar have only partly offset the impact.

Worst affected has been Chevron's Gorgon LNG project, being built at the remote Barrow Island off north-west Australia, where the budget has blown out by $US17 billion beyond the original $US34 billion.

The cost pressures coincide with the slump in crude oil prices, which mean that in the absence of a price recovery, revenues earned by the near $200 billion of local LNG projects under construction or just completed will be much lower than anticipated by their owners.

The onshore site for the Ichthys project, which is 30 per cent owned by French oil major Total SA, has seen some problems with sub-contracted work, including the construction of a power plant which led to a contractual dispute between UGL and its US-based joint venture partner CH2M Hill.

Inpex, partly owned by the Japanese government, softened the blow of the cost and schedule revision with the news that the production capacity at the onshore plant is being increased, by about 6 per cent to 8.9 million tonnes a year from the initially planned 8.4 million.

It also advised that it now expects to ramp up production from start-up to full output more rapidly than originally envisaged, without giving any details.

Construction of the project was about 74 per cent complete as of June. Under the original schedule given when the investment was given the green light in January 2012, production was due to begin near the end of December 2016, but that has now been put back to the September quarter of 2017.

Respected energy consultancy Wood Mackenzie said in May it believed Ichthys was running several months behind schedule and predicted production would only start in mid-2016.

The highly complex venture comprises four separate large-scale projects, two huge offshore structures, an almost 900-kilometre subsea pipeline, one of the world's longest, and the two-train LNG plant being built in Darwin.

Senior analyst Angus Rodger said then that management of the construction of the two offshore structures had been "especially difficult".

Wood Mackenzie is also assuming Wheatstone will be later than Chevron's current schedule of late 2016 and is assuming start-up only in mid-2017.

Inpex chief executive Toshiaki Kitamura noted that the Ichthys venture would operate for at least 40 years. He said all hte LNG that would initially be produced from the project has been sold, with about 70 per cent to go to Japan, the world's biggest LNG importer.

"The project is also expected to make a significant contribution to the social and economic development of Australia, one of the world's foremost producers of energy," Mr Kitamura said in a statement.

Inpex said the impact of the later start-up on its 2016 financial year results would be "minimal" and the costs are being covered by project debt and the company's own funds.